In this article, we look at the 7 cheap small-cap stocks to buy now. We also discuss the latest Federal Reserve actions and their effects on small-cap stocks.
At the September Fed meeting, the Federal Open Market Committee (FOMC) decided to lower its policy interest rate by 50 basis points to support the economy. Chairman Jerome Powell stated that this move is aimed at maintaining labor market strength while reducing inflation.
He also noted that future rate adjustments will depend on incoming economic data. The Fed’s economic projections indicate a federal funds rate of 4.4% by year-end, with further rate cuts expected as inflation falls and unemployment edges up slightly.
The market seems quite happy with the current cut cycle and expects more to come. According to CME’s Fed-watch tool, the market is expecting another 25 to 50 bps cut at the November meeting. As of September 27, 53.3% interest rate traders expect a 50 bps cut while the rest are anticipating a 25 bps cut.
While the market had gotten used to the high rates and was still thriving, the lower fed funds rates have given a much-needed boost as the broader market reached new highs.
Fed Easing Cycle Boosts Optimism for Small Cap Stocks
Greg Tuorto, a portfolio manager at Goldman Sachs Asset Management, recently joined Catalysts on Yahoo Finance and discussed the outlook for small-cap stocks in light of recent Federal Reserve rate cuts and broader economic conditions.
He highlighted several supportive factors for small caps, including a stable U.S. economy and opportunities in sectors like technology, healthcare, and consumer industries. Despite recent underperformance, he believes small caps are positioned for a rebound, driven by strong earnings growth rather than multiple expansions.
Tuorto also emphasized the potential for small caps to outperform large caps in 2025, given that their earnings outlook appears more favorable. He sees the ongoing Fed easing cycle as a tailwind and suggests that businesses have adapted well to the higher rate environment and could benefit significantly from any further rate cuts. While Tuorto isn’t focused on the exact number of cuts, he sees the broader trajectory as a positive catalyst.
The portfolio manager is especially bullish on software stocks and noted that lower rates make this sector more attractive, and he expects more IPO activity in the space in the coming months. For the future, Greg Tuorto also believes that there will be another cut probably in the near future.
With that, we look at the 7 Cheap Small-Cap Stocks To Buy Now.
7 Cheap Small-Cap Stocks To Buy Now
Our Methodology
For this article, we used the Finviz stock screener to identify nearly 150 small-cap stocks with positive forward price-to-earnings ratios. Our definition for small-cap stocks was stocks between $1 billion to $10 billion. Next, we narrowed our list to stocks whose earnings are expected to grow this year according to analysts, compared to the prior year, and have forward PE ratios below 15. Finally, we chose 7 stocks that were most widely held by institutional investors. The 7 cheap small-cap stocks to buy are listed in ascending order of their hedge fund sentiment, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Cheap Small-Cap Stocks To Buy Now
7. Celestica Inc. (NYSE:CLS)
PE Ratio (FWD): 14.02
Number of Hedge Fund Holders: 38
Celestica Inc. (NYSE:CLS) is a Canadian company that specializes in high-reliability design, manufacturing, and supply chain solutions. It provides a variety of services, including design and engineering, manufacturing, logistics, aftermarket services, precision machining, and supply chain management.
Its product offerings focus on hardware platform solutions for diverse sectors such as aerospace and defense, communications, health technology, industrial and smart energy, capital equipment, and consumer robotics.
The company is also making strides in its AI offerings, especially with its DS4000, a powerful 1U 32-port 400GbE data center switch, designed for high-performance AI tasks. In May, it introduced four new networking switches designed to meet the performance and connectivity needs of modern enterprises. The products include secured access switches ES1000, ES1010, ES1050, and secured gateway switch EG1050.
All four switches are designed in a compact 1U form factor, which provides secure and scalable networking solutions with various memory and processor options. They also include redundant, field-replaceable fans and power supplies for improved reliability and can deliver up to 90 Watts of Power Over Ethernet on any port.
Moreover, the company offers various storage solutions, like the SC6100 all-flash storage controller and the SD6200 storage platform, to help companies manage their growing data needs while improving efficiency and reducing operating costs.
In 2024, analysts expect an approximately 50% year-over-year EPS growth for Celestica (NYSE:CLS) and it is currently trading at a forward PE ratio of 14.02x, compared to the 24.37x sector median.
According to our database of over 900 hedge funds, the company stock was held by 38 hedge funds with positions worth $843.930 million in Q2. This brings the company to the 7th spot on our list of cheap small-cap stocks to buy.
6. United Parks & Resorts Inc. (NYSE:PRKS)
PE Ratio (FWD): 11.78
Number of Hedge Fund Holders: 39
United Parks & Resorts Inc. (NYSE:PRKS), formerly known as SeaWorld Entertainment Inc., is a prominent American theme park and entertainment company headquartered in Florida. The company has a portfolio of 13 parks across the United States and Abu Dhabi. It offers a range of attractions, from thrilling rides and coasters to family-friendly experiences and educational wildlife presentations.
It is also one of the largest zoological organizations in the world and helps in the rescue and rehabilitation of sick, injured, or abandoned animals. The SeaWorld rescue team has assisted over 40,000 animals throughout its history.
While United Parks & Resorts (NYSE:PRKS) is a cheap stock compared to its sector median, many analysts also view it in a bullish light. Among the consensus of 12 analysts, the company has an average price target of $62.00, representing an upside of 20.95% from current levels, as of September 27.
On September 4, B.Riley Financial’s analyst Eric Wold reaffirmed a Buy rating on the company stock with a $71 price target. The analyst’s positive outlook is based on several reasons, including a 1.9% increase in lease payments for the San Diego park year-over-year and a notable 22.2% growth compared to four years ago, which shows a strong revenue potential. Despite slight declines in attendance due to bad weather, a recovery in July indicates resilient consumer interest.
Wold is also encouraged by a $500 million share repurchase plan, showing management’s confidence, and he expects increased per capita spending and EBITDA growth as conditions normalize.
Voss Capital, LLC stated the following regarding United Parks & Resorts Inc. (NYSE:PRKS) in its Q2 2024 investor letter:
“New core long: United Parks & Resorts Inc. (NYSE:PRKS): Travel & leisure stocks remain deeply out of favor and, outside of cruise operators, remain well below their pre-covid valuation levels. Headlines such as the WSJ’s recent article titled “Americans Are Skipping Theme Parks This Summer” offer a glimpse of the current lousy sentiment. We think the misleading headlines along with dour vibes surrounding the US consumer are offering up an opportunity in United Parks & Resorts (PRKS), f/k/a SeaWorld, which contrary to headlines had positive year-over-year attendance growth in Q2. As veterans of concentrated small cap equity investing, we feel like we know a good roller coaster when we see one.
The origin of this storied company starts with Adolfus Busch (of Anheuser-Busch fame) and his desire to develop beautiful gardens across the country. For decades these parks, adjacent to his breweries, were used as a marketing tool to build the Anheuser-Busch brand. Over the years, animals and rides were added to the attractions. Busch Gardens Tampa Bay (opened in 1959) and Busch Gardens Williamsburg (opened in 1975) still operate and are among PRKS largest venues. In 1989, Busch Entertainment acquired the theme park division of Harcourt Brace Jovanovich and with it, SeaWorld…” (Click here to read the full text)
5. The Gap, Inc. (NYSE:GAP)
PE Ratio (FWD): 11.45
Number of Hedge Fund Holders: 39
The Gap, Inc. (NYSE:GAP) is an American retailer known for its clothing and accessories. The company operates several notable brands including its namesake Gap, Banana Republic, Old Navy, and Athleta. It takes the 5th spot on our list of cheap small cap stocks to buy now.
The company offers a wide range of casual and trendy clothing and its retail approach combines physical stores with online shopping, making it easier for customers to shop. They provide convenient services like curbside pickup and the option to buy online and pick up in-store.
On September 24, Gap (NYSE:GAP) announced that it is expanding its partnership with Disney with new apparel collaborations that feature classic Gap styles combined with popular Disney characters.
These limited-edition collections will be seasonal and offer stylish designs that differ from the usual Gap × Disney products. The first release called the Gap × Disney Collegiate collection, draws inspiration from ’90s varsity styles and includes clothing and accessories featuring Mickey & Friends alongside Gap’s logo.
The collection has patchwork varsity prints in preppy colors and collegiate fonts, with items like the Gap × Disney Denim Big Shirt displaying Mickey & Friends on the back. It also features matching fleece sets and unique denim styles with Mickey designs, available for adults, kids, toddlers, and babies, priced between $14 and $149.
In Q2, Gap (NYSE:GAP) reported strong financial results, marking its sixth consecutive quarter of market share growth. The company generated net sales of $3.7 billion, up 5% from the previous year, with comparable sales increasing by 3%. Store sales rose by 4%, and the company operated 3,568 stores in around 40 countries by the end of the quarter, with 2,541 being company-operated locations. Online sales also grew by 7%, accounting for 33% of total net sales.
In addition, it reported a net income of $206 million, with diluted earnings per share of $0.54. The company closed the quarter with $2.1 billion in cash and short-term investments, a 59% increase from last year. Net cash from operating activities reached $579 million, while free cash flow was $397 million.
For 2024, analysts expect a nearly 31% year-over-year increase in its EPS. As of September 27, Gap (NYSE:GAP) is trading at a forward PE multiple of 11.45x, nearly 34% below its sector median of 17.34.
4. Dropbox, Inc. (NASDAQ:DBX)
PE Ratio (FWD): 11.30
Number of Hedge Fund Holders: 41
Dropbox, Inc. (NASDAQ:DBX) is a California-based cloud storage service company. The platform provides users with a seamless solution for file hosting, synchronization, and sharing through a dedicated application that allows the creation of a special folder on their devices. The folder syncs with Dropbox’s cloud servers, which ensures that files remain updated across all linked devices.
The company has adopted a freemium business model, which allows users to access a basic level of service for free while offering paid subscriptions for additional features and storage capacity. The platform has expanded its offerings over the years and has integrated collaboration tools and acquired various companies to improve its functionalities.
It serves multiple industries including construction, media, technology, manufacturing, and education. Over the years, Dropbox (NASDAQ:DBX) has expanded its ecosystem by acquiring several companies to improve its services. Important acquisitions include Mailbox, an email app, and HelloSign, an e-signature platform, which have added useful features to the company’s main offerings.
On August 20, Reclaim.ai, a company that provides an AI-powered scheduling tool by the same name, announced that it has been acquired by Dropbox (NASDAQ:DBX). The acquisition will help the company improve its productivity offerings.
It will be able to provide users with a more streamlined way to manage their time and prioritize tasks effectively. Currently, Reclaim is used by over 320,000 people across more than 43,000 companies worldwide.
According to Insider Monkey’s database of 912 hedge funds, Dropbox (NASDAQ:DBX) shares were held by 41 hedge funds, valued at $481.008 million in the second quarter. With 10.3 million shares worth $231.76 million, Renaissance Technologies is the company’s most prominent shareholder, as of June 30. It is the 4th cheapest small-cap stock to buy now.
3. Scorpio Tankers Inc. (NYSE:STNG)
PE Ratio (FWD): 5.39
Number of Hedge Fund Holders: 42
Scorpio Tankers Inc. (NYSE:STNG) is a global leader in the responsible transportation of refined petroleum products, with a fleet of 112 vessels, including LR2, MR, and Handymax tankers. The company utilizes its diverse fleet to transport a range of products, including gasoline, diesel, jet fuel, kerosene, and naphtha from refineries to consumers.
It serves a wide range of clients, including oil corporations and traders, and optimizes its operations by employing both owned and time-chartered vessels.
On September 3, Scorpio Tankers (NYSE:STNG) announced the sale of two MR product tankers, STI San Antonio and STI Texas City, both built in 2014 and equipped with exhaust gas cleaning systems or scrubbers, for $42.5 million each. The tankers are expected to be sold by the end of the year.
Additionally, the company has made a deal to rent out another ship for three years at a daily rate of $29,550. The rental agreement will start in late 2024 and is with a well-known oil company. Overall, these moves show that it is actively managing its fleet to improve finances and generate reliable revenue.
Scorpio Tankers (NYSE:STNG) is a shareholder-friendly company and is committed to improving its shareholder value. It has also recently shared an update about its stock buyback plan. Since July 30, 2024, the company has bought back 2,415,321 of its own shares from the market, paying an average price of $72.45 for each share. From April 1, 2024, the total number of shares repurchased is 3,813,287, with an average price of $74.54 each.
As of September 6, the company has 50,760,778 shares left in circulation. Additionally, the company still has $225 million available to spend from the total $400 million that was set aside for this stock buyback program. Moreover, it is also a dividend-paying company with a yield of 2.23%.
Scorpio Tankers (NYSE:STNG) is ranked at 3 on our list of cheap small-cap stocks to buy now. As of September 27, the company is trading at a forward PE ratio of 5.39, at a significant discount of nearly 53% from its sector median.
2. M/I Homes, Inc. (NYSE:MHO)
PE Ratio (FWD): 8.61
Number of Hedge Fund Holders: 45
M/I Homes, Inc. (NYSE:MHO) is a major player in the American homebuilding industry for over four decades, constructing more than 150,000 homes in 17 different markets. Since 1976, the company has grown into a top builder of both single-family homes and townhomes. Its product lineup caters to a variety of homebuyers, from those purchasing their first homes to luxury buyers and retirees.
The company offers a full range of services beyond home construction, including financing, title insurance, and closing assistance. It prioritizes energy efficiency and sustainability, using durable materials and reliable appliances. Its commitment to quality can be seen by its multiple warranty protections for homeowners, which ensures long-lasting homes and peace of mind for buyers.
M/I Homes’ (NYSE:MHO) 1-year warranty covers workmanship and material defects, while a 2-year warranty addresses issues with plumbing, electrical, heating, and air conditioning systems.
The 10-year habitability warranty guarantees repairs for any defects making the home unsafe to live in, and the company’s industry-leading 10-year Transferable Structural Warranty covers major structural deficiencies. Additionally, homeowners benefit from manufacturers’ warranties on all high-quality components used in the home.
Along with being one of the cheapest small-cap stocks to buy, M/I Homes (NYSE:MHO) is fundamentally strong and is in a great financial position. As of Q2, it has $2.7 billion in equity, over $800 million in cash, and no outstanding borrowings under its $650 million credit facility. In addition, its debt-to-capital ratio of 20% and a net debt-to-capital ratio of -6% show a conservative capital structure, which provides financial flexibility for expansion or shareholder returns.
1. Abercrombie & Fitch Co. (NYSE:ANF)
PE Ratio (FWD): 13.96
Number of Hedge Fund Holders: 48
Abercrombie & Fitch Co. (NYSE:ANF) started as an outdoor specialty retailer in 1892. It has now grown into an international lifestyle brand, famous for its youthful and casual style, primarily catering to teens and young adults but also has offerings for the rest of the population as well. It also operates several sub-brands, such as Abercrombie Kids, Hollister Co., and Gilly Hicks, which offer a wide range of products, including loungewear, activewear, outerwear, sleepwear, and personal care items.
As of 2023, the company operates over 760 stores across the Americas, Europe, Asia, and the Middle East and also has a significant online presence. On its investor day in June 2022, it announced its “Always Forward Plan,” which aims to accelerate global growth and enhance shareholder value through a focus on omnichannel strategies and digital expansion.
The plan set financial targets for 2025, with projected revenues between $4.1 billion and $4.3 billion, and a sustainable operating margin of 8% or higher. Long-term goals include reaching $5 billion in revenue with a 10% operating margin.
The Always Forward Plan was built on three core strategies which include expanding brand growth, accelerating a company-wide digital shift, and maintaining financial discipline. Abercrombie & Fitch and Abercrombie Kids aim for 6-8% sales growth, while Hollister expects 0-2%, and Gilly Hicks is targeting a 15% growth rate by 2025. The company also plans to generate a minimum of $600 million in free cash flow by fiscal 2025.
Abercrombie & Fitch (NYSE:ANF) tops our list of 7 cheap small-cap stocks to buy now as its stock was held by 48 hedge funds, at a combined value of $1.306 billion, according to Insider Monkey’s database.
As of September 27, the company is trading at cheap forward earnings multiple of 13.96x, at a nearly 20% discount to its sector median. Moreover, analysts expect significant growth in the company’s EPS with a nearly 65% increase in its 2024 earnings compared to the last year.
For the stock price, according to the consensus estimates of 10 analysts, Abercrombie & Fitch (NYSE:ANF) has an average price target of $190, representing an upside of 31.49% from current levels.
Carillon Tower Advisers stated the following regarding Abercrombie & Fitch Co. (NYSE:ANF) in its Q2 2024 investor letter:
“Abercrombie & Fitch Co. (NYSE:ANF) is a global multi-brand omnichannel specialty retailer that offers a broad assortment of apparel, personal care products, and accessories for men, women and kids. The stock was a strong performer during the quarter following an impressive earnings report that exceeded expectations and raised guidance amid a rough patch for the retail industry. The management team has made powerful strides in reenergizing the brand and transforming the concept to a different and larger audience.”
While we acknowledge the potential of Abercrombie & Fitch Co. (NYSE:ANF) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ANF but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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